Monetary Policy Decision of the Board Meeting
Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: March 23, 2017
Monetary Policy Decision of the Board Meeting
I. Global economic and financial conditions
The global economic growth is expected to pick up this year. Among advanced economies, the US government may soon roll out fiscal stimulus programs to ramp up economic growth, while Japan and the euro area are recovering steadily. Growth in emerging market economies has accelerated thanks to a rebound in commodity prices. The Chinese economy has also kept pace.
Many international forecasting institutions expect the global economy will perform better this year than last year. However, greater economic policy and political uncertainties could be induced by the direction of US policies, the surge in trade protectionism, Brexit negotiations, and crucial elections in major EU member countries. In addition, with monetary policies of many central banks closely associated with the trajectory of future US Fed’s rate hikes and rising global inflation, international financial markets could face growing volatility, adding to the risk to the global economic recovery.
II. Domestic economic and financial conditions
1. Since the beginning of the year, Taiwan's export growth has been boosted by healthier global economic and trade growth, and domestic demand has been supported by renewed fiscal expansion. Labor market conditions continued to improve, the number of persons employed increased moderately, and the unemployment rate generally dropped. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecasts Taiwan's economy to advance at an annual rate of 1.92%, faster than the 1.50% of the year before.
2. For the first two months of the year, the average annual CPI growth rate was 1.09%, mainly owing to higher fuel prices driven by rising international oil prices and larger increases in food prices. Core inflation recorded an average annual growth rate of 0.90%, indicating mild inflation.
Despite an anticipated price uptrend for oil and other imported raw materials this year, the recent NT dollar appreciation has helped ease the pressure on imported inflation. Meanwhile, moderate domestic demand and a negative output gap have also contributed to a mild inflation outlook. For 2017 as a whole, the CBC forecasts CPI and core CPI inflation to rise 1.25% and 1.06% year on year, respectively. (See Appendix for the forecasts by major institutions.)
3. Against a backdrop of stable inflation and the ongoing economic recovery, the CBC has conducted open market operations to maintain ample market liquidity. For the first two months of the year, banks' excess reserves recorded an average amount of NT$54.4 billion. The average annual growth rates of bank loans and investments and the monetary aggregate M2 were 4.35% and 3.64% for the same period, respectively. Market liquidity is sufficient to support economic activity.
Since the beginning of the year, liquidity in the banking system has remained abundant, short- and long-term interest rates have stayed low, and Taiwan's stock markets have gathered steam. However, as the NT dollar appreciated amid foreign capital inflows, the overall financial conditions have tended to tighten, as reflected by the FCI (financial condition index).
III. Interest rate decision
The Board has taken into account elevated uncertainties over US and European economic policies, a gradual domestic economic recovery, and the fact that actual output is still lower than potential output. Meanwhile, current inflationary pressures and future inflation expectations are both mild, whereas a stronger NT dollar has put domestic financial conditions under strains. Considering an adequately accommodative monetary policy stance is conducive to the economic recovery, the Board judged that a policy rate hold will foster robust economic and financial development.
The Board reached the following decision unanimously at the Meeting today:
The discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral are kept unchanged at 1.375%, 1.75%, and 3.625%, respectively.
The CBC will continue to monitor both international and domestic economic and financial developments including those related to realized and expected inflation. We will undertake appropriate monetary policy actions in line with the central bank’s statutory mandate.
IV. The NT dollar exchange rate is in principle determined by market forces. Nevertheless, volatile political and economic changes around the world could induce massive and erratic cross-border capital movements and disrupt Taiwan's foreign exchange and financial markets. If the abovementioned factor leads to excess volatility and disorderly movements in the NT dollar exchange rate with adverse implications for economic and financial stability, the CBC will step in to maintain an orderly market.
V. Around the world, the stimulus created by monetary easing deployed after the global financial crisis has gradually faded and it is imperative to follow up with fiscal easing. To support sustainable, balanced economic development, high-quality investment should be on top of the agenda and complemented with structural reforms. The current low-growth, low-rate environment would also prevent fiscal stimulus from crowding out private investment. In Taiwan today, the government approved the “Forward-Looking Infrastructure Development Plan,” which is expected to create jobs and bolster productivity toward sustained long-term growth while improving living conditions as well as quality of life.
 A similar call is made in the Communiqué of G20 Finance Ministers and Central Bank Governors Meeting this March.